With a new level of discipline tied to the times, retailers are hoping to eke out more profit with a lot less inventory.

Inventory levels at many chains are down 15 percent or more from a year ago, but instead of simply going on the defensive against stock gluts and consequent markdowns, stores quickly are learning to make their existing inventories more productive, bringing merchandise into stores closer to when it’s needed and being more selective in what they buy and replenish based on actual sales results.

While adapted to stave off the worst sales downturn of their lifetimes, these new mandates are expected to serve retail executives well once spending begins to recover.

“What you want to do is make sure inventories are in line with the consumption trend,” said Stephen I. Sadove, chairman and chief executive officer of Saks Inc.

That’s a challenge for Saks, where same-store sales fell 26.6 percent in May following declines of 32 and 23.6 percent in April and March, respectively.

Receipts at Saks for the fall season will be down around 20 percent, a number that is “about the rate of consumption,” he said. “We will be in a much leaner position, so we’re expecting relatively large declines in inventories versus last year.”

Sadove said the cuts will be “across the board” and will include both basics and fashion. “The art of this is a quest for balance,” he said. “You can’t cut drastically into one or the other.”

Rick Darling, president of LF USA, noted many stores reacted quickly to the slowdown in consumer spending even before the second half of last year.

“Certain retailers in early 2008, at the first signs of consumer weakness, reacted earlier than others by bringing their levels of inventory down,” he said. “Between the fourth quarter of 2008 and the first quarter of 2009, the average reduction in inventory levels was between 15 and 18 percent.

“We’re also seeing a recognition among retailers that they can run the stores with less inventory and still be profitable. It’s an adjustment in the thought processes.…That’s the benefit of going through this tough business cycle. That’s a good thing in the long term. There’s a desire to run the stores on less inventory and turn it faster,” Darling said.

There’s also a sense that inventory levels are beginning to stabilize at retail. Stores seem to be on track with getting their stock levels in line with their sales.

Inventory-to-sales ratios compiled by the U.S. Census Bureau provide a clear indication of just how hard certain retailers have worked to keep their inventories in line with falling sales. In April, the last month for which figures are available, the ratio for all retailers grew to 1.54, up from 1.49 a year earlier. For clothing and accessories stores, the increase is nearly identical — 2.59 versus 2.55 last year — but, for department stores, the ratio dropped to 2.09 in April from 2.15 in the prior year.

During that April-to-April period, retail sales dropped 11.3 percent overall while those at apparel and department stores fell 7.5 and 6.2 percent, respectively. Overall inventories are down 8.5 percent during that stretch, while those at apparel and department stores declined 6 and 8.9 percent, respectively.

Many retailers seem resigned to the idea that the shipment faucet has been shut so firmly that they might even have to begin chasing merchandise. Terry Lundgren, chairman, president and ceo of Macy’s Inc., hinted at that possibility in an interview early this year.

“We will get our inventories down very tight,” he said. “We’ve all been scrambling to reduce orders. We will get to the point where we will be scrambling to increase orders. Inventories will be lean and that’s a good way to make money, a good way to raise margins and a good way to improve sell-throughs.”

Since retailers don’t want to be caught off guard again, markdowns will become “more strategic, rather than rampant, to reduce inventories. There will be less of a panic and more of an orderly process,” Lundgren said.

That may even result in empty shelves in some cases.

Lou Amendola, chief merchandising officer of Brooks Brothers, said inventories have been cut back so far that the chain actually had some popular items sell out for Father’s Day: “It was like the old days. Hopefully we’ll train customers to buy things quickly before they’re gone.”

Among the items that sold out were men’s polos with contrasting colors on the collars, madras sport shirts and purple gingham shirts. He said that the goal for holiday is to continue to “keep inventories very lean” — so much so that consumers will be faced with a “scarcity.”

Amendola said that inventories on basics such as white shirts or underwear are down 10 percent and the store is leaning more heavily on its suppliers to speed up replenishment. “We don’t have to keep as many weeks of supply,” he said.

In fashion goods, however, inventories at Brooks Bros. are down between 15 and 25 percent. “This allows us to have more open-to-buy available and keep our inventories fresh. We think that when customers see large quantities of the same items, they think we’ll still have it a month from now and prices will be reduced further,” said Amendola. He explained that while one cannot disappoint on core basics, “it’s OK to sell out of a purple shirt or an outerwear item.”

“I think retailers and wholesalers are realizing that you can be more profitable but don’t have to have more inventory,” he concluded.

“Selling out is a good thing,” said Saks’ Sadove. “In the luxury market, it’s all about exclusivity and limited supply.” By having product disappear from store shelves, “the result will be better margins and fewer markdowns.”

But, Sadove said, once again it’s a balancing act between creating demand and not disappointing customers. “If you have too little merchandise, it won’t feel like you’re in business. And we still need to represent the trends and fashions that we want for the consumer, but we can’t have too much.”

He noted some stabilization since the “free fall” that began in September, but pointed out consumers are still seeking deals when they do hit the stores. “Things will recover, but people do respond to sales,” he said.

Not every retailer has dropped inventories in the double-digit percentage range.

Mindy Meads, president and chief merchandising officer at Aéropostale Inc., said, “Our inventories were down 4 percent in total and 13 percent per square foot at the end of the first quarter due to stronger sell-throughs. We are managing our inventory very closely and have been able to react to customer trends. We have been buying conservatively and remaining nimble using fabric contingencies and improved product flow strategies.”

Aéropostale, however, has had atypical sales results — in May, April and March, its comparable-store sales grew 19, 20 and 3 percent, respectively.

Wesley Card, ceo of Jones Apparel Group Inc., noted in the company’s first-quarter conference call on April 29, “Retailers continue to keep inventories in line through promotions and events, and we did the same thing in our own chain of retail outlets and regular price stores where we kept inventories very well controlled through the period.”

Battling to move ahead in an environment that’s been especially tough on his sector, jewelry designer Steven Lagos noted it’s now necessary to be focused on productivity above all else. He explained that while stores in general are adjusting inventory levels downward and looking to prevent stock bloating wherever it might surface, it is paramount that retailers not “get caught with a lot of markdowns. That’s very healthy in a macro sense. We see stores getting better at taking action and improving the merchandise mix.”

It will have benefits in the long run, too. “It also means more pressure on the creativity [side] to deliver the right price-value proposition,” Lagos said.

Still — citing centuries-old axioms about “not selling from an empty card” — some retailers have an almost genetic fear of being caught with low inventories.

Scott Collins, general merchandise manager of DTLR, the Baltimore-based urban chain, is keeping inventory levels steady. “You can’t do any business if you don’t have inventory,” he said. “We’re looking at everything very closely, but we’re not going to run scared. [Even in these tough economic times,] we’ve seen our sales blossom when fresh goods come in. Our pipeline has to be fresh.”

Collins said the privately held company, formerly known as Downtown Locker Room, posted a single-digit sales increase in 2008 and comps were up 10 percent in the first quarter of this year. May and June sales, however, haven’t fared as well. June is down around 9 percent but was up against an 18 percent comparable-store sales gain in 2008, he said.

“Every time I look back and see the point where our business got better, it was when we stood our ground and didn’t hide in a corner,” he said.

DTLR has cut back on the number of new vendors it is adding, at least for the time being, and is leaning more heavily on its top suppliers to help boost business. “We always test new things, but right now we’re working harder to fix the business with our existing brands,” Collins said. “We know that to go from the laboratory to the place where they’ll affect our business is a 12-month process. And we’re not in that business today. So we’re trying to reinvent and reposition certain brands so they either stop bleeding or flourish.”

LF USA’s Darling, whose firm sources for many vendors and retailers, said, “We now see that those who adjusted their inventories earlier in 2008 were more comfortable in the first and second quarter of this year than those who began adjusting inventory levels after September 2008. They are the ones who are now beginning to increase their inventory levels, although it is still down about 5 to 10 percent from year-ago levels. They are chasing product that is working and selling.”

Darling added that retailers are putting in more inventory in replenishment of both core and fashion merchandise. “There was this sense of a free fall from September to January, but we’re not seeing the same feeling now. There has been some stabilization of business to a degree, and there have been good sell-throughs at retail. Retailers are chasing fashion goods that sell, and they don’t want to be out of stock on basic items.”

He expects an increase in inventory levels for holiday, at least in stronger performing categories such as fashion accessories and fashion apparel, where retailers will look to maximize results. “The real key will be not only preserving market share, but also getting customers into the store,” Darling said.

Darling said great product and great new fashion, for the most part, are selling. “In almost every category, the reality is that customers are reacting to fashionable goods, not basics, and it’s the fashion that is stimulating the customers and getting into the stores. Retailers need to give consumers a reason to buy,” he noted.

Jeffrey B. Edelman, director of retail consumer advisory services at RSM McGladrey Inc. and a former retail analyst, cautioned one of the current problems with the sale mentality of the consumer is “she’ll see something she likes and wait for it to go on sale. What happens is that by the time it goes on sale, it is no longer the size or color that she wants. Retailers have to wean the consumer off of looking for the price cuts.”

Brooks Bros.’ Amendola said getting customers out of the sale mentality “will take years. Customers have to get used to going in and seeing something is sold out. Then maybe next year, they won’t wait as long.”

Gary Wassner, president of Hilldun Factors, which specializes in working with designers and luxury goods, said inventory levels for the high end have fallen significantly since September. “When I talk to the retailers at the high end, we’re talking about a 20 to 25 percent drop. They are cutting back on who they purchase from and the scope of how much,” Wassner said.

Wassner added, “Retailers across the board have been asking my clients to lower their prices.” He explained that retailers want to lower their costs when buying the goods, yet still sell quality luxury goods comparable to a year ago. The reduced prices will help the retailers’ bottom lines, but it is too early to quantify what it will mean, by percentage, to their profitability, he noted.

Wassner pointed out that his vendor clients are making corresponding adjustments to cuts in orders, from cutting back on staff to reducing styles within a collection. “They’re also not speculating on inventory levels. They used to anticipate reorders of a certain percentage, but now they are anticipating cancellation of a certain percentage,” Wassner said.

And they are delaying receipts in many cases, he said: “Many retailers are asking for staggered deliveries. It used to be retailers couldn’t wait until mid-June for fall goods, but now they are having merchandise shipped later and closer to season so they are not sitting in the stores. This is how people are buying now and it means there will be less to mark down later on. Our vendor clients had been trying to get the ship dates to change for a long time, but retailers had refused to accept it. Now this sea change in shipping is seen as a logical move in both good and bad times.”

Retail consultant Walter Loeb of Loeb Associates said, “Retailers are planning very tightly. They are finding that they can now do 5 percent more with the stock they have on hand. If business continues to be even a little bit better than expected, that will drop to the bottom line and help a lot. It helps even more with lower inventories. I see retailers editing the merchandise and being more focused. They are eliminating peripheral merchandise. We are also seeing a new business model where they are asking for goods to be shipped closer to season for the consumer to buy when needed.”

Loeb said every retailer is trying to have goods shipped from overseas in less time, and said J.C. Penney Co. Inc. has reduced overseas shipping to just 17 weeks. That’s a drop from the former customary time frame of 52 weeks within the last year. Stores such as Zara, H&M and Forever 21 have shown that fast turnarounds are indeed possible.

Loeb sees all these changes as good news for the retailer. “The more the retailer can control its inventory, the greater is its ability to improve margins. There is a direct relationship between inventory controls and better sell-throughs, because those two factors help boost margins,” he said.

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